Hollande on “collision course” with Merkel, says Jersey’s Geoff Cook

Jersey Finance CEO Geoff Cook sees a danger of financial centres being attacked by governments of countries such as France, should the bond markets punish any u-turns on austerity measures.

James Carville, former Bill Clinton political adviser once famously said of reincarnation: “I wanted to come back as president or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

European bond spreads are already rising in reaction to elections, making borrowing more expensive for the deficit nations, and equity trading screens are a sea of red. So what has triggered this early reaction?

In France president Francois Hollande’s policy agenda will deny ratification of the new fiscal discipline treaty unless more growth measures are put in place. Growth means investment, investment means spending, so de facto a softening in the pace of austerity and or more borrowing.

The promise of austerity pain relief has been enough to ensure popular support but puts Hollande on a collision course with the German chancellor’s implacable commitment to fiscal discipline. Only the next few weeks will reveal whether an accommodation can be found. Meantime international investors are bailing out of French debt.

Softening the austerity programme is already in the plan, with reduced retirement ages, higher minimum wages, 60,000 more public sector jobs, and a super tax at 75% for the wealthy. Despite these measures the commitment to balancing the budget by 2017 remains, but no detail on how the circle will be squared.

Markets were already worried about the viability of delivering an expansionary programme whilst cutting the French deficit, currently at 5% of GDP and a government infrastructure which consumes 56% of annual output. With a €1.7trn debt mountain, an annual trade deficit of €70bn, and unemployment at 10% and rising, Hollande must spell out his plan to deliver fiscal discipline whilst engineering growth. If he doesn’t the bond market will punish his new administration very quickly.

The impact could be felt through increased eurozone instability which would impact our banks, private equity and asset management industries as clients rein back on transactions in these markets. An unbundling of the fiscal compact will reignite eurozone sovereign debt worries increasing prospects of a default and acting as a brake on US and developing country recovery.

Plenty to worry about, but the one to watch so far as we in Jersey are concerned is the potential for discriminatory action. The French wealth tax will have little impact on Jersey as we don’t have many French clients, but an exodus of wealth creators and entrepreneurs from France will mean the super tax collects little and president Hollande’s sums don’t add up.

At that stage the temptation to hit out at a foreign blame candidate may be too great to resist and we could see a recurrence of “Le Paradis Fiscal” rhetoric.